Corporate Finance Company Profile: General Electric Company - Essay Example

1. Introduction – A very brief introduction about company, its industry, products and its market share in the industry. General Electric Company (GE)is a well renowned company in the field of broadband technology, financial services and media. The main products and services of the company include power generation, aircraft engines, security technology, and consumer financing. At the end of the third quarter of 2008, GE made a move to sell its consumer finance business to Shinsei Bank. By the end of the year 2008, GE was operating its business in five major segments, media and entertainment, capital finance, Energy Infrastructure, Technology infrastructure, consumer and industrial. Moreover, company also acquired Vital Signs, Inc. and Merrill Lynch Capital in the year 2008 in order to strengthen its business operations. In the early 2009, GE also acquired an Italian corporate bank. An overview of GE’s product line is stated below: Aviation: GE is one of the premier companies that provides aviation services and is one of the leading producers of jet engines. GE also provides engines to marine, military and the corporate world. Electrical Distribution: GE provides various electrical products and also provides control solutions to residential, commercial and industrial customers. Energy: Due to the high consumption and growth in the energy sector GE deals in various energy products in more than 120 countries which is quite beneficial for the company’s future return and growth. Finance-Consumer: GE also provides credit services, loans, mortgages to the individuals and the corporate world. GE business technique is based on customer’s loyalty, commitment and trueness. GE knows the customer’s needs and evaluate it with the introduction of new products in their range. GE’s vision is to make life fun and easy for consumers. GE not only working in the US but also exploring the market globally and serves the customers with pride. GE’s business strategy is to take competitive advantage over other competitors not only in the US but also in the global world. In order to meet the customer need and pay full attention to the every individual customer with end to end solution GE trained their staff and engaging them with the new and rising technology .This trick helps GE to generate more resources and maximizing overall profit. The main rival of the GE is Siemens AG (ADR), United Technologies Corporation, and Koninklijke Philips Electronics NV (ADR). GE is working on heightened regulatory and market scrutiny of corporate governance practices in order to communicate and represent the organization in a manner that pleases the shareholders, utilizing resources in a new and evolving compliance environment. Management should be eyeing the macro factors like Government’s policies, competition and tax rates where they operate business because local, national or international jurisdictions and new or changing regulations might create hurdle in their way. Company’s strong point is that they have sharpened their focus on sales, service and customer orientation and are eagerly looking forward to improve its product and service quality .In order to capture the market and the segment in every possible manner, the management is passionate to maintain the performance momentum and competitive advantage in the marketplace. 2. Financial Summary A. Past 3 years total assets & liabilities data, trend and discussion. There has been a positive increment in cash and cash equivalent in the year 2008 in comparison with the year 2007 and 2006. The sole reason behind this is the decrease in investment in the securities and also it may be attributed to the financing receivables. Moreover, holding of the short-term borrowing makes an impression on cash and cash equivalents. GE utilizes its reserve or liquid cash in a profitable manner because GE makes an investment in securities, which in the end makes a profit for the company. The utilization of cash for investment purposes also shows in the current and quick ratio, and is a healthy sign for the company’s future prospect. Due to the expansion in business, GE requires some fixed asset, the maximum utilization of which can result in improvements of business operation and meeting the market demand, which is why there is a slight variation from the year 2006 to 2008. GE has applied proper inventory management techniques and policies. Due to high demand of the companys product less percentage of inventory is in hand, and the inventory turnover is also evidence of proper inventory system adopted by the GE throughout these three years (Myers, Brealey and Marcus, 2001). GE is primarily financing their activities through debt. Creditors have shown confidence in the companys ability, and have granted loans to them. Due to the expansion in the business volume, GE has been acquiring debt to finance their business activities both domestically and internationally, which is why the short term liability has slightly decreased in the year 2008 with respect to the previous years, 2006 and 2007. Overall high tendency has been recorded in the total liabilities in the year 2008 the company acquired some more debt as compared to the previous year, which is very high in comparison to previous years because GEs volume of business is high and has been soaring since 2006 and the trend is increasing. So, there is a high need to finance increase in operations with debt. B. Past 3 years net income and cash flow data, trend and discussion. Exploring new market or international segment and addition in the product line are the prime factors for increase in the net income in the year 2007 with $22,208. From another perspective, the Net Income has slightly decreased, primarily due to the credit crunch and recession in the economy, which brings a bad reflection on the GE’s net income in the year 2008. Moreover, GE has also reverted to the use of some indirect channels to increase its sales both domestically and internationally, this has effected the selling and administrative expenses in 2008 but on the whole it shows that the management has adopted a very effective policy and has a very good internal control that has led to making an impression on the net income (Myers, Brealey and Marcus, 2001). The cash flow of GE from 2006 to 2008 suggests that its operating activities are slightly high in the year 2008 in comparison with the rest of the years, due to its massive business volume and operations in more than 120 countries; there has been an increase in the operating activities of the company. GE’s management has, however, controlled its investing activities in the year 2008, primarily, due to the prevailing credit problem, in comparison with the year 2006-07. Although GE is financing its business with newly issued debt, its overall financing activities have declined in the year 2008. But good news for the GE’s management is the overall impact of cash and cash equivalent, which is not only positive but healthier in 2008, in comparison to previous years. C. Dividend Policy – Dividend amount, dividend yield and dividend growth rate YEAR 2008 2007 2006 Dividend $12,649 $11,713 $10,675 Dividend Per Share (DPS) $1.24 $1.15 $1.03 Dividend Growth Rate 8% 9.72% 10.65% Dividend Yield 4.4% 2.9% 2.9% (Annual report, 2008-2006) GE has a bright history of paying dividends consecutively for the past 32 years from 1976 to 2007. The premier feature of the entire dividend policy throughout the years from 2006 to 2008 is its incremental growth, which is a good sign for GE’s future perspective. It is quite evident that Dividend per share (DPS), dividend and dividend yield grows steadily which is good sign, but the dividend growth rate has dropped year by year, from 2006, the sole reason behind which is the slump in the economy that prevails. D. Capital Structure – Debt to Equity ratio and amount, fixed assets Vs. current assets, last reported liquidity position. YEAR 2008 2007 2006 Debt to Equity Ratio 6.62 5.89 5.25 Debt $693,104 $680,124 $585,174 Equity $104,665 $115,559 $111,509 Current Ratio $4.18 $3.98 $3.86 (Annual report, 2008-2006) It is quite evident that GE has been able to keep Debt to Equity Ratio almost constant through out the 3 year. It is very much prominent fact that GE has basically eyeing on debt financing and its balance sheet reveals the fact that as the business expands year by year the need of short and intermediary term finance is also well grown up. It is very much evident that from the year 2006 to 2008 GE’s balance sheet is densely populated with the debt financing which makes a signal to the debt holders that the creditor shows a confidence on the company’s debt management policy. GE has given a lot of emphasis to managing its net working capital so keeping that into consideration in the whole 3 years GE also grown up its assets as per the proportion of its debt it is quite noticeable that GE has acquired its asset (like increment in the fixed assets, cash and account receivable) in the last three year with the help of debt financing but the fixed assets in the year 2008 is slightly shrink due to the credit crunch and liquidity problem the GE’s management takes a tentative approach towards making capital expenditures in the year 2008.The current ratio reveals the fact that there is a consistent trend in the current ratio from the year 2008 to 2006. This liquidity trend discloses that due to the market expansion year by year the need of working capital is persistent, which reflects that there is no liquidity crunch. Even though, the GE has increased its current assets slightly, which may indicate the fact that the company has expanded into newer dimensions, it is quite evident that no drastic change has occurred in the company’s financial policies. On the whole we suggest that liquidity position of the GE has been in a state of stability in terms of paying off its current debts. E. Other Statistics – Leverage, Hedging info, Book value per share, market price per share, stock price trends, analyst opinion, P/E ratio, earnings expectations, etc. YEAR 2008 2007 2006 Debt to Total Assets (Leverage) 0.87 0.85 0.84 Book Value per Share 0.01 0.01 0.01 Price Earning Ratio 9.42 17.00 18.61 Market Price per Share $16.20 $37.07 $37.21 (Annual report, 2006-2008) GE’s D/A ratio have almost been constant through out the past three years. It suggests that GEs utilization of debt in order to capitalize assets is persistent throughout three years time. A constant D/A ratio would place the company in a comfortable position, as it nullifies the amount of risk, especially if the interest rates are rising. Hence, a lower D/A ratio would be more desirable. Book value per share is also constant throughout the three years, the sole reason behind which is relatively lesser dependency of GE on Equity financing, because of which GE pays relatively less to the investors than the accounting book values. Both Price earning ratio and market price per share is dipping year by year because of the tough economic conditions that have had a toll on the industry’s earning power growth and market price (Myers, Brealey and Marcus, 2001). GE uses hedging strategies like interest rates, foreign exchange and commodity prices and specially uses hedging strategies in cross currency transactions. Moreover, GE also uses hedge accounting technique for valuation. The prevailing price of GE’s stock dated June 19, 2009 is valued at $12.13. According to the stock analysts, most recommend buying the stock or if someone already owns the stock, to hold it because the company has been able to sustain the negativity brought about by the economic crisis and also due to the companys domestic natural-gas turbine business, which makes a positive impact on GE’s stock. 3. Current Issues & concerns – Information can be received from reviewing past news and company filings to SEC. According to the Reuters, that reported on June 19, 2009, that GE got orders worth $8 billion in the Air show at Paris. GE also provides credit facility to Arizant Inc worth $75 million. Moreover, West Jet signed MRO’s with GE worth over $850 Million in order to provide Jet Engines to them (Reuters, 2009). 4. Macro Economic Events – How current macro economic (both US & International) events affecting the company? Due to the unfavorable economic conditions GE suffers losses in revenue generated by its financial services segment (Annual report, 2008). Due to the deterioration in market price of the real estate and also the liquidity crunch it is a tough task for GE to predict any sales price of its product and services and there is also a decline observed due to the less occupancy rates (Annual report, 2008). 5. Financial Analysis Summary (At least one page – inferences from data/numbers). According to my analysis and estimations, I summarize the following points regarding the financial condition of GE. The points are stated below: GE should opt for a strong strategy between the accounts payable and accounts receivable because in the end it makes an impression on the operating cycle. GE’s management also looks after the short term liquidity which is pointed out in the current ratio and makes necessary adjustments to finance the business with short and intermediate financing modes according to the business requirements. Formulate strategies in order to reduce costs of production which resulted in capturing more market segments at competitive prices. Sound working capital management policies through out the period from 2006 to 2008 and I assume that this policy will continue in the future. Cash reserve is increased primarily because of expansion in business volume and also the debt financing which really helps the company’s perspective to hold the cash at the optimum level. Net Profit of the firm is fair enough from 2006 to 2008 but due to the slight macro economic factors and slightly internal negligence or lack of operational management suffers the GE the company in the year 2008 but on the whole it is the prime responsibility of the GE’s management to revise its strategy and redefines its role in the business which in the end generate revenues at upside. 6. Conclusion GE portrays a very strong and positive position in the markets place and without doubt this company has an ability to challenge its rivals to have a girds to become the market leader. There are certain areas where GE should pay attention to like in the area of working capital, net profit margin, reduction in revenue expenditures on consistent basis and assist in increase its investor’s confidence towards the organization. All in all, after reviewing the annual reports from 2006 to 2008, one can evaluate that the directors and senior management of GE keenly practice the corporate governance affairs, SEC rules and regulations, and give a lot of emphasis on meeting the accounting and auditing standards in accordance with the international laws, and compliance affairs. Reference Brealey, Richard A., Stewart C. Myers, Alan J. Marcus, (2001). Fundamentals of Corporate Finance. New York. McGraw Hill General Electric Company. (2008). Annual Report. General Electric Company. (2007). Annual Report. General Electric Company. (2006). Annual Report. Salmon, Felix. "General Electric Company (New York Stock Exchange)." General Electric Company (New York Stock Exchange). Web.22 Jun 2009. . Read More